How to Determine Price Sensitivity? Analysis

How to Determine Price Sensitivity? Analysis

The marketing mix, commonly referred to as the 4Ps (Product, Promotion, Place, and Price), helps capture the value for a firm's chosen customer segments. The first three variables of the marketing mix represent the cost to the firm. The role of pricing is to tap into the value created and generate revenues. If the price setting or pricing is done right, then the revenues will help fund the firm's cost and enable current and future value-creating activities like research and development, and generate a profit.

One key element in determining the price is "Price Sensitivity" (PRS), also referred to as "Price Elasticity of Demand". This sensitivity varies across customers, time and products. PRS analysis seems pretty intuitive. But firms need a structured approach which can help judge the PRS. There are at least 3 major factors or elements that influence / determine price sensitivity:

THE MAGNITUDE (ABSOLUTE AMOUNT) OF THE PRICE: The PRS is greater for high-cost categories than for low-cost categories. For example, a 10% price differential on a sports car will have a far bigger impact on the buyer than a 10% price differential on a tube of toothpaste. The PRS increases with the absolute monetary cost of the product. In other words, if the aggregate cost of the product goes up, the PRS also increases.
WHO PAYS? A customer can be sensitive for the price of products he pays for and not/less for other products. For example, in the case of an automobile for personal use, the car user is also the one who pays. When the automobile is given to him/her by the company, he/she is not paying for the same. Also, there are other situations when the product's user doesn't pay the entire amount but pays partly. For example, the user pays only part of his health insurance, and the company pays the remaining amount. Thus, the user will have a lower PRS than if he would have to pay the entire amount.
COMPETITIVE FACTORS: The PRS will be higher when two products don't have significant perceived differences. Also PRS is higher when it is easy to compare products and their prices. Similarly, PRS also increases when it is easy for a buyer to switch between products. Difficulty in switching can arise due to actual, economic reasons (for example: if a penalty or a loyalty program is involved) and psychological reasons (for example a higher perceived risk or a desire to stick with a familiar brand).

⇒ Please help to make this topic more complete. What are your thoughts on analyzing price sensitivity?

Source: Dolan, R.J., and Courville, J. T. (2009), "Principles of Pricing", Harvard Business School Publication, 9-506-021.